Most people will understand that income taxes due on buy to let property investments will be a simple matter of rental income less expenses = rental profit and income taxes at your highest rate of taxes will be payable on the rental profit. There are however, a number of points to consider currently for buy to let income taxes.
Think Like a Business
Income less allowable expenses is your gross profit just like any business.
Rental Income should be easy to calculate for each tax year.
Allowable Expenses: (these can be offset at your highest rate of income tax)
*Financial and Loan Interest
Firstly, it is the interest only on the mortgage or loan, it is not any capital repayment element that can be offset as an allowable business expense.
Before 2017, you were allowed to offset mortgage interest costs at your highest rate of income tax whether that is 20%, 40% or 45%. Then interest payment relief/credits were phased in over 3 years to restrict relief to 20% basic rate relief (20%) as follows:
Capital Costs and Home Improvements: These cannot be offset against income taxes but keep a record as they can be offset against your capital gains liability if you sell the property later for a higher price (gain). E.g., If there is a fully functioning bathroom, you cannot offset costs as an expense if you replace this with a luxurious ‘wet room’ as this is a capital improvement and not a maintenance expense.
Overseas Landlord UK Property
If you live overseas or are an expat that has moved overseas, your tenant or managing agent is legally required to withhold income taxes on rents paid before it is passed to you. This is to ensure that overseas landlords are paying income taxes (just in case they ‘forget’ to submit UK tax returns). 10 years ago, HMRC were sending teams of tax inspectors to letting agents offices to check they were doing this for landlords resident overseas.
You can register with HMRC under the ‘Non-Resident Landlords Scheme’ (NRLS) and once you have been accepted, there is no longer a requirement for taxes to be withheld on rents paid and you can be paid gross as HMRC now has your details to enforce self assessment tax returns on you.
British Nationals overseas and some nationals from other countries may be entitled to a full UK personal tax allowance.
Making Tax Digital Income Tax and Self Assessment (MDT ITSA)
Limited companies are required to file VAT returns on turnover and expenses to HMRC quarterly and employers are required to complete Real Time Information (RTI) weekly or monthly reporting on payroll, income taxes and national insurance during their payroll run and before employees are paid. This is all part of digitising taxation under MTD. You must use a standalone HMRC approved software provider and cannot file with HMRC direct on their website.
MDT ITSA for Landlords:
Quarterly tax returns for both landlords and the self employed with income greater than £10,000 pa was supposed to start with effect 6 April 2024. This has been postponed. If you are a landlord, you may soon have to complete quarterly property income tax returns from April 2026 as follows:
For more see MDT ITSA
Other useful links: